Evidence for and against the validity of the capital asset Pricing model

Abstract

The Capital Asset Pricing Model (CAPM) makes a significant contribution to understanding the relationship between return and risk and valuing assets in the capital market. The basic idea of the CAPM model is that assets exposed to the same level of systemic risk should have the same level of expected return. Therefore, the CAPM model values the asset, ie. determines its price at a level that ensures that the expected return corresponds to the assumed systemic risk. In addition to the positive aspects of the CAPM model, the paper pays equal attention to understanding the problems and taking into account the shortcomings and limitations that this model faces. The aim of the research is to find an answer to the question of whether the CAPM model is the correct model for valuing financial assets. In this regard, the paper presents numerous pieces of evidence for and against the validity of the CAPM model, concluding that, even after more than half a century of research, no consensus has been reached in the financial literature on the presence or absence of its validity.

Keywords

• capm model
• systemic risk
• portfolio
• beta coefficient